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One Toke Over The Line

While Bitcoin, Blockchain, Ether, Ripple and endless initial coin offerings dominate the imagination of retail investors, there is an equally appealing, and even more disruptive, agricultural product arriving soon from Amazon on your doorstep. Cannabis will generate EBITDA margins and cash conversion percentages that make online sports gambling paltry by comparison. My prediction is that 48 states will have legalized cannabis in some form by 2021, and the federal government will legalize it soon thereafter.

Right now, the cannabis industry is in its infancy. Nine states and Washington, DC, have legalized marijuana for recreational use — no doctor’s letter required — for adults 21 years of age and older.  Medical marijuana is legal in another 29 states.

This Is A Cash Crop

Unfortunately, the cannabis industry has the same problem Pablo Escobar had with his drug money – it is illegal for national banks to accept cannabis deposits because marijuana is still classified as a Schedule One narcotic, along with heroin and cocaine. A small number of state banks and credit unions have accepted cannabis industry deposits after strict adherence to a checklist of “know thy customer” procedures that inhibit money laundering. However, until last week, they all feared Jeff Sessions who had vowed to prosecute state banks or credit unions that violated federal law. However, by a rare bipartisan vote, the House Appropriations Committee voted to add a rider to legislation funding the Department of Justice through 2019 that would shield providers who complied with state laws. Whether this becomes law soon is uncertain, but I bet tax revenues will prevail.

States Will Legalize For Tax Revenues

States will continue to legalize cannabis because most of them are broke and need another dependable and growing source of revenue. Eventually, you will see the Feds get in line because the Federal Reserve System abhors a cash economy as a matter of monetary control, and it is hard to pay state and federal taxes in cash. For example, Arcview Research predicts that legal cannabis sales will more than double from $9.0 billion today, to more than $21.0 billion by 2021.  If you assume taxable income is 20% of revenues, and the combined federal, state and local rate is 30%, this means $1.2 Billion in tax revenues. That’s a lot of cash to transport. It would probably take a fleet of Brinks and Loomis armored cars just to make each quarterly tax deposits not to mention the crooks who will try to steal the cash?

A Schedule One Narcotic Is Now Healthier Than Liquor

Also, it is now suggested by cannabis proponents that lifetime use of cannabis is healthier than alcohol.   Based on my own experiences from the 1970’s, pot has the half- life of plutonium and the numbing effect of an Easter Sunday sermon. The new and more powerful buds must induce a permanent state of being “stoned” which the Urban Dictionary defines: as a “ state of mind which occurs after smoking enough marijuana to the point where the user stares blankly into whatever catches his/her attention”. “I’m was so stoned I didn’t notice the movie was in French.”

In any event cannabis is here to stay simply because it will be regulated and taxed like liquor and cigarettes and its soporific effect on the electorate will be absolutely fine with every incumbent politician.

8.2 Million Users Did Jail Time Mostly For Mere Possession

This is an amazing reversal given that ACLU reported in 2010 that of the 8.2 million people arrested for marijuana over the prior decade, 82% were simply for possession. Remember in 1971 when Brewer and Shipley released their single “ One Toke Over The Line”? Spiro Agnew called them subversive and got the FTC to ban the song? Luckily, Lawrence Welk thought it was a gospel spiritual and One Toke maintained its top 10 momentum in the bible belt. This is all according to brewerandshipley.com which summarized it as follows:

“One Toke Over The Line” became a Top 10 hit in 1971, and was largely responsible for introducing Brewer & Shipley to the masses.  While the record buying public was casting its vote of approval by buying the single, the (soon to be disgraced) Vice President of the United States, Spiro Agnew, labeled Brewer & Shipley as subversives, and then strong-armed the FCC to ban “One Toke” from the airwaves just as it was peaking on the charts.  Brewer & Shipley landed on Nixon’s Enemies List, a badge of honor they wear proudly to this day.  Even in the midst of all the fuss about the drug related lyrics, Lawrence Welk featured “One Toke Over The Line” on his show in 1971.  Check out this bizarre story and the hysterical “One Toke” video from the Welk show.  As Brewer & Shipley like to say, you couldn’t make this stuff up.”

[youtube https://www.youtube.com/watch?v=k6VZM5T9fEo?feature=oembed&w=862&h=647]

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Rob McCreary

Rob McCreary has more than 40 years of transactional experience as an attorney, investment banker and private equity fund manager, and has spent his career in building entrepreneurial organizations with successful track records. Founder and chairman of CW Industrial Partners (originally CapitalWorks, LLC), he is responsible for developing and maintaining senior relationships with investors and portfolio governance.

This blog represents the views of Rob McCreary and do not reflect those of CW Industrial Partners or its employees. This blog is not intended as investment advice. Any discussion of a specific security is for illustrative purposes only and should not be relied upon as indicative of such security’s current or future value. Readers should consult with their own financial advisors before making an investment decision.